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A Rough Guide To Individual Carbon Trading: The Ideas, The Issues and The Next Steps
A Rough Guide To Individual Carbon Trading: The Ideas, The Issues and The Next Steps
uk
Contents
Executive Summary .............................................................................................................................. 3 1 1.1 1.2 1.3 1.4 2 2.1 Introduction ................................................................................................................................... 7 Outline of this briefing ............................................................................................................. 7 What makes individual carbon trading attractive ................................................................. 7 What individual carbon trading cannot do ............................................................................ 8 Our starting point ..................................................................................................................... 9 Existing Proposals for Individual Carbon Trading.................................................................. 11 Individual or Downstream carbon trading schemes......................................................... 11
2.2 Typology of existing proposals ............................................................................................ 12 2.2.1 Tradable Energy Quotas (TEQs) ......................................................................................... 12 2.2.2 Domestic Tradable Quotas (DTQs) ..................................................................................... 13 2.2.3 Personal Carbon Rationing [or Personal Carbon Allowances (PCAs)].............................. 13 2.2.4 Rate All Products and Services ........................................................................................... 13 2.2.5 Ayres Scheme...................................................................................................................... 13 2.2.6 Sky Trust .............................................................................................................................. 14 2.3 2.4 2.5 2.6 Voluntary trading systems .................................................................................................... 14 Offsetting at the point of purchase....................................................................................... 15 Upstream trading systems .................................................................................................... 16 Other options .......................................................................................................................... 17
2.7 Main areas of debate and dispute......................................................................................... 17 2.7.1 Feasibility and fraud prevention ........................................................................................... 17 2.7.2 Allocations to children .......................................................................................................... 17 2.7.3 Inclusion of personal air travel ............................................................................................. 18 2.8 3 3.1 3.2 3.3 4 4.1 Taxation and Trading ............................................................................................................. 19 Relevant work in other fields..................................................................................................... 21 Financial literacy research .................................................................................................... 21 The scale of UK loyalty cards ............................................................................................... 23 Other fields of potential relevance to individual carbon trading....................................... 23 What do we need to know about individual carbon trading? ................................................ 25 The questions that need answers......................................................................................... 25
4.2 The limited knowledge to date .............................................................................................. 27 4.2.1 Technical and operational feasibility .................................................................................... 27 4.2.2 System costs........................................................................................................................ 28 4.2.3 Economic impacts ................................................................................................................ 29 4.2.4 Distributional impacts, equity and justice ............................................................................. 29 4.2.5 Political acceptability ............................................................................................................ 31 4.2.6 Public acceptability and response........................................................................................ 31 4.2.7 Effect of downstream instruments on upstream investment (and vice- versa) .................... 31 4.2.8 Interaction with post EEC3 cap and trade............................................................................ 32 4.2.9 Compatibility/Interaction with existing UKCCP instruments................................................. 33 5 5.1 5.2 Developing a road map .............................................................................................................. 35 Why pilots are not a good idea ............................................................................................. 35 A road map for a UK system of individual carbon trading................................................. 37
Executive Summary
Defra commissioned the Centre for Sustainable Energy in mid-August 2006 to undertake a short study to provide some initial analysis of the ideas and issues involved in the concept of individual carbon trading. The primary purpose of the study was to assess the range of questions which arise when such a concept emerges from the rarefied atmosphere of academic debate and thinktanking to be considered seriously as a potentially practical policy option. At a theoretical level, individual carbon trading variously described as personal carbon allowances, domestic tradable quotas, personal carbon rations, carbon credits is an attractively simple idea. By giving everyone a limited allowance to cause carbon dioxide emissions, total emissions from the population can be limited. Those who need or want to emit more than their allowance have to buy allowances from those who can emit less than their allowance. This cap-and-trade system thereby has the potential to constrain in an economically efficient, fiscally progressive, and morally egalitarian manner the 40 50% of UK carbon dioxide emissions caused directly individuals. This is, of course, assuming both that the political system managing it can maintain and tighten the cap on total emissions and that the population has access to opportunities to curb their own emissions. The state of the debate (Section 1) In assessing the current state of the debate on individual carbon trading, we found a range of interests largely focused on the operational minutiae of specific schemes and on examining the minor theological differences between them. Yet the differences between the schemes appear to be less important at this stage than the largely untested assumptions shared by them all about public responses and political feasibility. We also found a range of arguments being raised against individual carbon trading schemes which make equally untested assumptions about public acceptability (or lack of it), operational problems, scheme costs, and political feasibility. Such arguments often make far more positive (but still largely untested) assumptions about the relative merits of other policies to curb carbon emissions, particularly carbon taxes. We believe there is a strong risk that the debate on the relative merits of individual carbon trading will descend quickly into confrontational debate in which practical understanding and analysis take second place to the preservation of increasingly entrenched positions. We conclude that it is important at this early stage to ground the debate quickly in considerations of political and practical feasibility and that all potential policy instruments for achieving UK carbon emission reduction goals are considered on a similar basis. The various individual carbon trading schemes (Section 2) There are three main schemes proposed for individual carbon trading: Tradable Energy Quotas (TEQs by Fleming); Domestic Tradable Quotas (DTQs by Starkey and Anderson at Tyndall a development of Flemings work) and; Personal Carbon Rations or Allowances (PCAs by Hillman, Fawcett and Boardmans team at Oxford). The principal variables with the schemes are: Participation: who participates (individuals, organisations, or both),
Allocation: to whom are permits allocated and what proportion of national emissions are included Scope: what carbon emissions are included All share a similar approach to system management: an independent body sets and polices the cap, with limits established well in advance people can either surrender allowances as they buy energy, petrol or flights, or they could sell their allowances in advance and pay for the carbon as part of the price of each qualifying purchase (as visitors to UK would). individuals would have something like a carbon credit card to swipe to surrender their allowances from their carbon allowance accounts. TEQs Participation
Individuals (40% free) and organisations (60% tendered, principally to market makers from whom organisations then buy as required) Adults only equal per capita (plus organisations as above) on weekly rolling basis Gas, electricity, coal, oil, road fuels
DTQs
As TEQs
PCAs
Individuals only (assumes organisations covered by another, unspecified scheme). At least 40% of UK emissions (i.e. all domestic plus aviation) Adults full equal per capita allowance; children under 18 half an allowance Gas, electricity, coal, oil, road fuels, personal aviation, (not public transport)
Allocation
As TEQs
Scope
The main areas of dispute and debate between the schemes relate to the approaches required to prevent fraud, the inclusion (or exclusion) of children, and the inclusion (or exclusion) of personal air travel. Section 2 also examines voluntary trading schemes, offsetting at point of purchase, upstream trading and carbon taxation. Other relevant fields of research (Section 3) There are a number of other fields of research which may be relevant for understanding the implications of introducing and operating an individual carbon trading system. Research for the Financial Services Authority indicates that less than 20% of UK adults have financial problems caused by being poor at making ends meet and keeping track of their finances. If this research reads across to carbon allowances, most of the population would be able to manage and keep track of their allowances. It may not be relevant to understanding how well people would be able to deal with trading, though the approach taken in the FSA research may well enable such questions to be explored more fully. Literature on loyalty cards exposes the scale of system development which has been achieved in other fields of consumer behaviour. Simplistic estimates indicate that Tesco Clubcard is collecting, storing and analysing some 50 billion pieces of data a year from the companys financial
transaction system as 12 million cardholders buy their shopping. This compares with an estimate of 15 billion pieces of data a year for an individual carbon trading system. Literature exploring (variously) the introduction of the Euro and public responses to the introduction of VAT on domestic fuel and increases in road fuel duty may also help inform understanding of the operational, political and public implications of introducing individual carbon trading. What we need to know about individual carbon trading (and how little we already do know) Section 4 details a range of questions which need to be answered to enable a reasonable assessment of individual carbon trading as a future policy tool. These cover: Political Acceptability (what are the conditions for political acceptance? Political and institutional viability (what is needed institutionally to make it work?) Public reaction and acceptability (how will the public understand it, react to it and respond within it?) Related measures (how does it relate to other policy instruments, particularly other trading schemes?) Market reaction (what will happen in energy, housing, transport markets and what carbon trading schemes and scams will emerge without careful management?) Technical and operational feasibility (can it work and be resilient and sufficiently fraud proof and can the banking system provide the foundations?) Set up and operational cost (how much to set up and run?) Economic impact (how does its impact compare with other ways of constraining carbon in the economy?) Equity, justice and distributional impacts (who wins and who loses, by how much and where?) Most of the questions detailed here have yet to be answered and, in much of the literature, have yet to be asked. There is analysis which concludes that it would be technically feasible to run an individual carbon trading scheme but no real estimates of cost or even system specifications. A presumption that any system would need to be highly resilient to fraud (even though the value of carbon allowances is likely, at least initially, to be relatively low) has tended to cloud the debate on costs with that surrounding biometric ID cards. A more simple approach may be to look to the existing banking and financial transaction systems to manage carbon accounts and transactions, and to existing government personal databases for allocating allowances to individuals. In terms of economic impacts, we have found no attempts to model the impact of introducing individual carbon trading. We also note that any such modelling in future must distinguish between the general economic impact of constraining the economys carbon emissions and the particular impact of using an individual carbon trading scheme to do so. Modelling to date of distributional impacts indicates that individual carbon trading is less regressive than carbon taxes (particularly if personal air travel is included), even if a carbon tax system manages to optimise the recycling of revenues through the benefits and tax credit systems to compensate those of lower incomes. Indeed, individual carbon trading can be moderately progressive.
Section 4 also examines some of the possible interactions between a system of individual carbon trading and upstream trading such as the EUETS, a post EEC3 energy supplier cap-and-trade, and current UK Climate Change Programme policies. Developing a road map (Section 5) Using the questions identified in Section 4, we consider a sequence in which the questions could be answered to build up sufficient knowledge and understanding to enable rational and informed decisions to be made about the value of individual carbon trading as a policy tool. These are mapped out over a five year period (see Section 5.2). We also explain why we believe that it would not be a good idea to initiate a public pilot of individual carbon trading, either in the near future or at all. This principally because the main issues with any such scheme are the quality of the transaction system (which will inevitably be unrefined and fault-ridden in a public pilot) and the compulsory nature of participation (which cannot be tested in a pilot). We suggest instead a programme of system development and testing off line (as occurred with the London Congestion Charge, which was never publicly piloted) and the development of simulation games and trading system games to see how individuals and groups respond. Such an approach, alongside other steps on the road map, will expose weaknesses and frustrations in any system while also gathering real world carbon emission data for individuals and households which could assist modelling work. The first year next steps in the road map focus on: Political acceptability: Institutional feasibility: Public reaction: Modelling: Understanding the basis on which politicians would decide to do this Exploring how our political system (electoral cycles, oppositional politics, need for independent authority) could handle this Understanding the basis on which people will judge a system acceptable Improve models of individual carbon emissions and improve understanding of abatement opportunities and costs to create testing rig for systems and model distributional impacts (particularly fuel poverty) Examine potential for full alignment with banking system and simple allocation system based on existing registries
Systems design:
We believe that focusing on these questions early will provide solid foundations to base future assessments of the potential value of individual carbon trading as a policy tool to curb domestic carbon emissions in the UK.
Introduction
Following undertakings made in the Energy Review 20061 and ideas explored publicly by the Secretary of State2 in July 2006, Defra commissioned the Centre for Sustainable Energy in midAugust 2006 to undertake a short study to provide some initial analysis of the ideas and issues involved in the concept of individual carbon trading. The primary purpose of the study was to assess the range of questions which arise when such a concept emerges from the rarefied atmosphere of academic debate and think-tanking to be considered seriously as a potentially practical policy option. What do we need to think about, find out, model, or test, to establish whether this concept has practical merit in the real world? How does it compare with, and relate to, other tools of public policy and private persuasion designed to achieve the same objectives?3
1.2 What makes individual carbon trading attractive: Guaranteed emission controls through enforced personal responsibility
At a theoretical level, individual carbon trading variously described as personal carbon allowances, domestic tradable quotas, personal carbon rations, carbon credits is an attractively simple idea.
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HM Government (2006, The Energy Challenge: Report of the Energy Review, DTI, July 2006 (see www.dti.gov.uk/energy/review/page31995.html) Speech by David Miliband at the Audit Commission, 19 July 2006, at www.defra.gov.uk/corporate/ministers/speeches/david-miliband/dm060719.htm) Readers should note that this briefing was not commissioned to answer the question of whether individual carbon trading has practical merit; its intent is to identify the issues which need to be thought about, found out about and decided upon to reach an answer.
By giving everyone (or at least every adult) a limited allowance to cause carbon dioxide emissions, total emissions from the population can be limited. Those who need or want to emit more than their allowance will have to buy allowances from those who can emit less than their allowance. It is an attractive idea because it has the potential to constrain carbon dioxide emissions in an economically efficient, fiscally progressive, and morally egalitarian manner. If the total allocation of allowances is lower than the existing total carbon dioxide emissions, then emissions will have to reduce to fit within that cap. The cap could therefore be set and tightened over time to reduce emissions in line with international agreements, or nationally adopted targets or community or organisationally determined ambitions. Carbon emission reductions could potentially thereby be guaranteed in the half of UK emissions caused directly by individuals. Such theoretical certainty in a cap-and-trade system is generally not available from carbon taxbased systems which may not set prices at the right level to change behaviour enough to avoid emissions. It is also not available from restrictive regulation which tends not to pre-empt new ways the population finds to use (and waste) energy or the new and additional journeys it chooses to make. Cap-and-trade neatly side-steps debates about the extent to which energy efficiency initiatives will deliver reductions in carbon dioxide emissions. Because allowances can be traded, economic theory suggests enticingly that the system should result in carbon emission reductions at lowest cost across the population compared with approaches which rely more on regulation or government intervention. Why, the theory asks, would anyone buy allowances to emit carbon dioxide from someone else if it were cheaper for them to reduce their own emissions?4 Individual carbon trading can potentially be fiscally progressive. If allowances are allocated on an equal per capita basis, those who emit more carbon than average (who tend to be richer) will be buying allowances from those who emit less than average (who tend to be poorer). Individual carbon trading is also attractive because it appears to reach aspects of human behaviour which seem to be immune to other policies and programmes. It can both enforce and incentivise individual responsibility amongst a population which has so far appeared unable and/or unwilling to constrain its collective urge to drive, fly, and consume more electricity5. And by explicitly involving the entire population in reducing carbon emissions, it maximises the collective intelligence and imagination applied to the task.
1.3 What individual carbon trading cannot do: Cap-setting and enabling individual action
However, the simplicity and apparent effectiveness of individual carbon trading as a policy tool can lead to an impression that it will inevitably deliver carbon emission reductions. Even if it proves to be a practicable proposition which, as this report examines, is by no means yet demonstrated it is no such panacea. The carbon emission reductions delivered by individual carbon trading will depend on the cap set for total individual allowances. This cap will be set not by climate scientists or by proponents of
To sustain this theoretically pure conception of humans as economically rational beings rather than habit-driven and subject to advertising and cultural norms economists argue that if anyone does pay more to emit rather than reduce their emissions, it is because they are taking account of hidden transaction costs which havent been costed properly into external assessments of the price of emission reduction. What Tadj Oreszczyn has described as our innate ability to think of new ways to use energy
contraction and convergence but by politicians or their appointees. The policy tool has the theoretical capacity to deliver significant emission reductions, but only if it is wielded effectively by politicians to cap emissions. Similarly, the introduction of a system of individual carbon allowances will not make it immediately any easier for people to take action. It may motivate them to take action but it will not enable them to do so. At the outset, it is unlikely to change quickly the availability or cost of low energy products, public transport, or microgeneration installations or to make it safer to cycle in a city. Individual carbon trading is not therefore a substitute for other policies to stimulate emission reductions. It may, by motivating individuals to act, serve to amplify the effectiveness and reduce the costs of other policies. But it will not remove the need for those other policies. These are important considerations because public acceptability and positive response to individual carbon trading is likely to be related to the ease with which the public can source information, select products, access services and change behaviour to cut their carbon emissions. Individual carbon trading will not therefore avoid the need for tough political decisions about emission reduction targets or about the proportion of emission reductions which will be expected from individuals (as opposed to organisations). And it does not avoid the need for other policy action to stimulate and sustain action by individuals and organisations to create a market and society in which carbon cutting action is straightforward, signalled and supported.
For example, detailed study appears to have been undertaken (Starkey & Anderson 2005) into the length of time that people would have to queue in a petrol station to pay for their petrol with their carbon allowance either on the same swipe card as their money or using a different one. While this may be a relevant impact to consider in due course, little study (if any) appears to have been devoted to exploring more fundamental questions such as the basis on which the public might judge the acceptability of such a scheme (which may or may not include the length of time taken to make carbon-based transactions).
encourages sceptics to take up strong positions against the proposition. The result is a confrontational debate in which practical understanding and analysis take second place to the preservation of increasingly entrenched positions. We believe it is important at this early stage to ground the debate quickly in considerations of political and practical feasibility. We do start from a position that meeting the Governments stated ambitions to reduce emissions by 60% by 20507 will require the adoption of policies and programmes which are significantly more effective than current activities in stimulating deep and lasting cuts in emissions. If something must be done, the questions we need to be asking are: (a) whether individual carbon trading could be part of that something (is it technically, economically and politically feasible and effective?) and (b) whether individual carbon trading should be part of that something, bearing in mind the possibility that there may be other more effective alternative policy tools. We start from the perspective that individual carbon trading will have to be considered politically acceptable if it is to be adopted as a policy tool. Without political acceptability, individual carbon trading will not be introduced. Yet none of the literature has examined explicitly what may determine its political acceptability. In Section 4 we endeavour to describe the various questions we believe will need to be answered for politicians to consider it acceptable. Central to this will be public reaction and engagement. As with political acceptability, the publics likely reaction to individual carbon trading has hardly been examined within the academic literature. Initial discussions for this project with various experts point to the likelihood that public acceptability will be heavily influenced by: the design of the scheme (efficiency and ease of use) the extent to which it ensures that there are no special privileges or free-riders (both within the population but also organisations and possibly other countries) the perceived ease of action and anticipated cost of inaction (i.e. carbon)
Or any greater emission reduction target adopted to reflect latest scientific evidence of the risks of climate change
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This section examines the body of academic work that has been carried out in the area of individual carbon trading to date. It identifies the different schemes put forward as well some specific areas of debate and dispute between proponents. In addition, because there is also a debate about the effectiveness of cap-and-trade versus carbon taxes as a more practicable alternative, we examine the relative merits of taxes and trading. In the time available for this study, this cannot be an exhaustive examination of the academic literature. It was also not possible in the time to make contact with all of the proponents to explore uncertainties in more depth. However, we believe it can provide enough detail to enable informed decisions about the next steps required. Section 4 examines in more depth what is known, and more importantly, what isnt known about individual carbon trading.
These choices represent some of the key areas of difference/debate between various schemes and their proponents. A common characteristic across all proposals is that individuals are issued their initial allowances on an equal per capita basis, free of charge. On the other hand, where organisations participate they are expected to pay for their initial allocation, typically via an auction (usually along the lines of a Government Debt Tender) rather than by an allocation plan. Scope Which fuels or activities are included in the scheme?
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A complete scheme covering all carbon emissions from UK energy consumption would include gas, electricity, oil, coal, private road fuel, public transport, and domestic and international aviation.
Scope Gas, electricity, coal, oil, road fuels (aviation is not mentioned). System management Individuals can opt out of the process by immediately selling their units (bank account required), and then buying back from the market alongside energy (carbon) purchases. Those without a registry account (eg tourists) buy this way too (effectively pay as you go). Register of accounts maintained by separate specialised entity. All permits are identical, and all individuals and organisations have access to the market. Traders earn their income via buy/sell price spread. Permits are surrendered in proportion to carbon usage, and passed up the transaction chain from final users (individuals and organisations), via retailers, wholesalers, and producers, before finally being surrendered back to the registry which issued them. The system generates revenue via a weekly tender of rations for organisations (equal to 1/52*60% = 1.15% of overall ration for the current year).
Fleming (2006) Energy and the common purpose. David Fleming. 2006. www.teqs.net
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2.2.2
Described as a cap-and-trade scheme for end users of energy, the DTQs proposal is a detailed technical analysis by Tyndall Centre in support of Flemings proposal (see above) for a domestic carbon trading system involving all individuals and organisations. Initial allowances are free to individuals but auctioned to organisations. The key difference with Flemings proposal is that the DTQs scheme includes aviation. A diagram of how the system is expected to operate can be found in Appendix 1.
2.2.3
Introduced by Mayer Hillman and Tina Fawcett (Policy Studies Institute) in How to save the planet (Penguin 2004), this is a proposal for domestic carbon rationing and trading for individuals only. Overall carbon cap: Covering about 40% of all UK emissions, with another mechanism needed for the remaining 60%. Phased annual reductions in the overall cap correspond to the national emissions reduction target, and are signalled well in advance. Allocation of permits The system is compulsory it is assumed that free-riding would derail a voluntary scheme. There are equal annual rations for all adults, and smaller rations for children. Scope of emissions All household energy use and personal travel including all aviation (this appears to rule out public transport). System management Based on a carbon credit card debited whenever carbon is consumed. There is an assumption built into this scheme that organisational emissions will be addressed through other cap-and-trade schemes or policy instruments.
2.2.4
Qualified as unfeasible in its description by Starkey and Anderson (2005 see footnote 9), the proposal is to allocate 100% of all UK emissions permits to individuals, but then rate all products and services available in the economy according to their associated/embodied carbon emissions, deducting the appropriate amount from allowances when individuals purchase goods and services.
2.2.5
Ayres Scheme
This proposal is similar to Domestic Tradable Quotas, but differs in that 100% of the total allowance is initially allocated free of charge to individuals (as opposed to 60% being auctioned to organisations). Organisations then have to buy permits from individuals (via market makers), so that the revenue from the sale of permits to organisations goes directly to individual permit sellers rather than to the government. This avoids a grandfather-based assumption about the proportion
9 Starkey and Anderson (2005), Investigating Domestic Tradable Quotas: a policy instrument for reducing greenhouse gas emissions from energy use, Tyndall Centre, TR29, 2005 at www.tyndall.ac.uk/research/theme2/final_reports/t3_22.pdf
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of carbon allocated to organisations, by assuming that only individuals have an intrinsic right to emit carbon, and that organisations must effectively lease this right from individuals. However, it creates the need for a potentially far more complex auction involving millions of individual sellers, rather than one which involves only organisations, market makers and the Government.
2.2.6
Sky Trust10
The Sky Trust concept involves an upstream trading system within which permits are auctioned to fossil fuel suppliers. The revenues from the auction are invested into a trust which pays equal dividends to all citizens. As a result the cost of carbon is factored into fossil fuel prices, and the system will tend to appear to downstream entities (individuals and organisations) as a (variable) carbon tax, with revenue recycled on an equal per capita basis via the trust fund.
10
See www.usskytrust.org
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In addition, downstream trading will create a market in which energy suppliers will have to adjust their business activities as a result of real consumer behaviour, rather than as a result of the imposition of quotas by government which would be the case in an upstream system such as a supplier cap-andtrade.
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The Tyndall study (Starkey and Anderson 2005) has examined technical and operational feasibility of DTQs in some depth. Their conclusions are transferable to other schemes. Debate over feasibility tends to focus on the difficulty of creating a fraud-proof allocation system in the absence of a fraud-proof national population registry. There appears to be general acceptance of the feasibility of creating a system for carbon allowance transactions alongside the financial transaction. However, there is debate over whether the need for fraud prevention requires any allocation system to be linked in some way to biometric ID cards (a debate driven principally by a wish not to tar individual carbon trading with the disputes around ID cards). As discussed further in Section 4.2.1, the perceived need for a link to ID cards is largely dependent on the presumed level of resilience to fraud required in the system rather than any intrinsic quality of individual carbon trading.
2.7.2
Allocations to children
Scheme proponents differ over whether children should be allocated allowances. Those against children receiving an allowance (eg Boardman, pers comm.; Fleming, Starkey and Anderson)
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justify this on the basis that children are not players in the energy market in that they do not work, earn money or purchase energy. However, this argument would apply equally to one of every pensioner couple since the energy bills tend to be in one persons name and many pensioners no longer drive. Those who are in favour of providing children with carbon allowances (Hillman and Fawcett) tend to provide them with half of an allowance. This appears to reflect a compromise between the nota-player argument and the egalitarian equal rights to emit argument. It also reflects a sense that children do contribute in some way to their households carbon emissions, both through increased energy use in the home as a result of childrens presence and purchase and use of appliances, and increased need and demand for travel. The importance of this issue relates to the fact that the more individuals allocated carbon allowances the smaller the allocation per person. Clearly this has a distributional effect of moving benefit from childless households (eg pensioners) to households with children, which will tend to favour families at the expense of pensioners and single person households. Dresner and Ekins (2004) have explored this issue in some depth. Their analysis reveals that both pensioners and households with children will gain on average if children each receive half an allowance (see Table in Section 4.2.4) while households with children lose out (and pensioners gain significantly) if children are excluded from the allocation scheme. As we shall examine in Section 4, the question of allocation to children is an important issue to explore with the public and to model in more depth.
2.7.3
While there has not been considerable debate, a clear difference between proposed schemes is the extent to which they include personal air travel. It is omitted from Flemings TEQs scheme but included in Starkey and Andersons version of this. This is an integral part of PCAs and justified on the basis that this is the fastest growing source of carbon emissions from individuals (Fawcett 2005). Indeed, if UK air travel were included in national emissions data for the UK, there would have been no reduction in carbon emissions from the UK since 1990. Its inclusion in PCAs is also justified to ensure individuals are considering not only their essential carbon emissions (achieving adequate warmth, basic travel etc) with more discretionary driven emissions (short-break holidays in Europe, patio heaters etc). The insulate your cavity walls if you want to fly abroad trade-off is intrinsically attractive to those who have been trying to persuade people to take up energy saving measures for the last 20 years! However the data on the use of personal air travel and the carbon emissions it causes is somewhat unrefined at present (eg Dresner and Ekins 2004).
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do anything about it. Furthermore there is no basis for assuming a linear relationship between greenhouse gas emissions and the cost of damages from climate change. Indeed climate science suggests that there is a number of potential positive feedback mechanisms, such as disruption of the Atlantic Conveyor, or disruption of methane hydrates on the ocean floors, which if triggered would lead to highly non-linear effects. As the Archbishop of Canterbury said recently, the economy is a wholly-owned subsidiary of the environment. The potential costs of climate change are so high as to be unquantifiable in anything other than economically theoretical terms, and much of the damage from climate change will be irreversible. This means that a premium should be placed on the certainty with which policy instruments can deliver greenhouse gas emissions reductions, leading to the conclusion that permits are more appropriate instruments than taxes for delivering climate policy objectives. However political considerations are as important if not more so than theoretical ones. The perfect system may be exist in theory, but is of little benefit if it cannot be implemented in practice. In political terms a hybrid system may well be more palatable than a pure permit trading system, since it would be inherently more predictable in terms of its economic impacts. A hybrid system would also offer more fine-tuneable controls, since in addition to the overall cap, the floor and ceiling permit prices could be used to adjust the behaviour of the system.
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We could not find or imagine analogues in other fields of human activity for individual carbon trading beyond rationing during and after World War 2. However, we could find some areas of service development, system management and research which could prove useful to consideration of the feasibility of individual carbon trading. These are supermarket loyalty cards (for speed of development and take-up and operational systems), the introduction of the Euro (ditto plus adaptability of the population to new currency systems), and recent financial literacy research (for understanding the populations capacity to manage money and therefore, by analogy, a carbon allowance). These are not examined in depth here since that is beyond the scope of this briefing. However, we can draw out possible implications for individual carbon trading from the financial literacy research. We can also expose the scale and sophistication of systems developed for Tescos Clubcard to demonstrate that the underlying systems for an individual carbon trading scheme are likely to be well within the technical limits existing operations of UK retail customer databasing and transaction tracking.
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Atkinson, A, S McKay, E Kempson & S Collard (2006) Levels of Financial Capability in the UK: Results of a baseline survey, Consumer Research Paper 47, Financial Services Authority, March 2006 (see http://www.fsa.gov.uk/pages/library/other_publications/consumer/index.shmtl) For example, an average overall financial capability score could be a combination of average scores across all four domains or two good scores and two poor scores.
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planning ahead: how well people prepared for likely future significant changes in income or expenditure, such as retirement, making provision for the unexpected etc The research found significant variation, with it being nearly as common for people to show no evidence of planning ahead as it is for people to have made careful plans. choosing products: how well people make decisions about financial products, their suitability for their circumstances, the information they seek. Most people score poorly on this one, bar a few exceptional cases. staying informed: how well people keep in touch with economic trends, developments in financial products and services, and sources of advice and help. As with choosing products, most people score poorly on this domain.
Through cluster analysis, Atkinson et al found that more than a third of the population (36%) were good across all four domains, and that these comprised mainly well-off older couples. A further 13% (older, lower income, mainly women) were very good at making ends meet and planning ahead but did not stay informed. 16% of the population were very poor at everything except keeping track of their money which they were particularly good at. There are a disproportionate number of younger low income women and parents with children in this group. With few financial products, they would probably be considered financially excluded. Overall, about 24% were not good at making ends meet and keeping track (as opposed to poor on other factors). More than a third of these (9% of the total) have high incomes and many financial products (indicating that their failure to keep track may not be a problem). However 3% of the total were disorganised financially and struggling, often with children, on low incomes (though not necessarily lower than others who are coping). Atkinson et als financial literacy factors map quite well onto what might be considered relevant for the capacity of the population to manage its individual carbon allowances.18 Making ends meet is obvious in a carbon allowance context. Planning ahead would relate, for example, to ability to factor future emission reductions into investment decisions on buying energy-using equipment, building improvements, and plans to travel long distances by plane or car . Choosing products aligns with the extent to which people understand the options, seek appropriate advice and make effective decisions. Staying informed would relate to the extent to which people keep track of what is happening to carbon targets and carbon prices, what is happening in other sectors, what new technologies and techniques are emerging etc. If the findings of this FSA study read across to how well people would manage their carbon allowances, there may be less than 20% of the population who would find it difficult and
18 Though, since carbon would have a price in such a system, it may anyway become closely associated with money in peoples minds
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problematic to keep track and make ends meet. The main difference is the potential for individuals to trade allowances, either to buy19 or sell, which is not easily analogous to money management (since most people do not regularly buy or sell shares). As identified in Section 5, there are a number of questions regarding the populations ability to understand and manage a carbon allowance which need to be researched further. The analysis undertaken by Atkinson et al in relation to financial literacy may provide a useful way to approach such research.
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public to see if it would work. Instead, the banking systems were tested extensively in parallel with existing systems. And public reaction and understanding was exhaustively assessed in opinion polls, focus groups and (in some countries) referenda (and thoroughly courted by both protagonists and antagonists in the debate). The second area, as discussed in section 4.2.1, is the operation of the UK banking system itself. What is the potential to use (for individual carbon accounting and trading) the financial systems used to manage accounts, register, clear and settle transactions, prevent fraudulent acquisition of money, and sustain consumer confidence? A third area for study is the introduction of the Congestion Charge in London. This was technically complicated and publicly apparently unpopular in advance of its introduction. It would also be instructive to consider public reaction in the past to attempts to introduce or increase possible alternatives to individual carbon trading such as household energy carbon taxes (or its proxy VAT on fuel in the early 1990s) and road fuel duty increases (in the early 2000s).
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Technical and operational feasibility Will it work and be sufficiently stable and meet politically acceptable standards of resilience to fraud? How long will it take to set up systems to work? Who would set up, control the process and run the systems? What accounting period would be most suitable? Set up and operational cost What will it cost to set up and run? How reliable are these estimates? Who will pay? Economic impact What is the economic impact of introducing such a scheme (cf constraining carbon emissions in other ways)?21 What do the Marginal Abatement Cost Curves for carbon emissions look like for different segments of the domestic sector? What level of trading is likely to take place and what factors will influence this and the price of carbon? Equity, justice and distributional impacts both socially and geographically Who will win and who will lose financially (depending on cost of carbon)? (household income, rural vs urban, housing condition etc) Beyond financial impacts, what other issues are there in terms of access to opportunities to reduce emissions (information and advice, products, services, capital etc)? Are there crunch points where, after some emission reductions, the cost of cutting carbon emissions increases dramatically for certain types of people (eg with particularly housing types or travel needs etc) which may alter the distributional impacts? What are the implications of extreme weather conditions (eg particularly cold winter) on overall demand for carbon (and how might the system handle these)? Are there mechanisms for avoiding or correcting these inequities within or outside the system? How do these impacts compare with those caused by other ways of curbing carbon emissions?
There are clearly many important relationships between these questions. Many of them have a direct influence on each other. For example, feasibility and cost is likely to be partly dependent on the tolerable level of risk of fraud which is a political question (and possibly also a public acceptability question). If the starting point is that system needs to be extremely resilient to fraud, it will probably have to be linked with biometric ID cards or the like (thus conflating this approach with a completely different objective and system and raising different issues for public acceptability and system cost and feasibility). However, if the tolerable level of fraud is more in line with that for benefits and tax allowances, it may be technically feasible to use existing benefits and tax registers (eg national insurance and child benefit) to manage the allocation of carbon allowances. Similarly, modelling may demonstrate that individual carbon trading is fiscally progressive (i.e. the poor do better out of it on average than the rich). But that doesnt mean that the public will understand this or think it through and not draw their own conclusions from a mistaken
21
Individual carbon trading will constrain the carbon emissions of the economy. However, the economic impact of this constraint (be it positive or negative) should not be confused with the economic impact of the particular policy tool(s) used to establish the constraint.
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assumption that any scheme in which the rich can simply pay to carry on polluting is inherently unfair or ineffective.22 In Section 5 we consider the relationships between these questions and propose a sequence in which it makes sense to develop answers to them. As mentioned in Section 1, the over-riding question is one of political acceptability, since without that being achieved, individual carbon trading will not be introduced.
22
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A number of responses to David Miliblands blog certainly took a vehement stance in opposition to individual carbon trading on the grounds that if youre rich you just buy as many carbon credits as you want and if youre poor its just tough without stopping to think who the rich might be paying for the credits. One of the authors was Commercial Manager and then Head of Personal Banking at Triodos Bank for 4.5 years
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Banks are familiar with reporting systems (such as those used for ISAs) to enable a regulator to monitor overall monetary holdings, detect fraud etc. They also have existing identity verification systems (principally designed for anti-money laundering and fraud prevention purposes) which (as Starkey and Anderson acknowledge) could be used for ID verification as people set up carbon accounts (either individually or jointly). The regulations governing ISAs already require banks to have systems to ensure individuals can only hold one of these tax-free savings accounts each in the banking system and can only subscribe a limited amount of money during any tax year (irrespective of withdrawals). This assumed potential for creating a carbon currency system within the existing banking system needs to be examined further. If feasible as assumed here, it would greatly reduce the complexity and cost of establishing both the accounting and transaction system since they would simply sit within existing systems with new reporting requirements to the trading schemes regulatory body. The allocation system which ensures that each eligible individual gets their allowance (and only once in the relevant period) may also be more straightforward than Starkey and Anderson have assumed. There are national registers for national insurance (all adults) and child benefit (all children) which could be used to check eligibility and trigger carbon payments into the carbon accounts which have been set up by individuals and their banks. It is only if a particularly high level of resilience to fraud is considered necessary (a political question) that more robust (and as yet non-existent) ID verification systems would be required. Bearing in mind that the likely market value of allowances, at least initially, will be rather lower than many existing benefits and tax allowances, a rather lower level of fraud-proofing may be appropriate than Starkey and Anderson assumed with their examination of the need to link allocation to ID cards. This approach would avoid the need for major and costly new IT infrastructure, with the focus being on allocation of payments and then reporting, monitoring and control systems. It would also avoid conflating individual carbon trading and ID cards which have completely different political and public acceptability and feasibility issues. We believe this option should be explored as a first step in the road map (see Section 5).
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On these grounds there have been arguments (eg Dresner 2005) against the need to set up a new system for individual carbon trading since it would be simpler and cheaper to use existing systems (tax and benefit) to achieve the same effect with a carbon tax. For reasons outlined in section 2.8, this assumed symmetry between cap-and-trade and taxation is not valid. If the impact on carbon emissions is both greater and more certain as a result of cap-and-trade, this may justify the cost of setting up a new system.
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Dresner S and P Ekins (2004) The distributional impacts of economic instruments to limit greenhouse gas emissions from transport, Policy Studies Institute, London, 2004
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Dresner and Ekins also found that individual carbon trading would be more fiscally progressive than a carbon tax, even if the revenues of the carbon tax were all recycled as effectively as possible through optimally targeted increases in benefits and other payments to low income households to address its direct regressive impact. In this optimised case, 30% of households in the lowest decile were still worse off (cf 19% for individual carbon trading) However, the research has not considered fuel poverty by taking account of housing energy performance and costs. By only looking at actual expenditure on fuel as opposed to required expenditure on fuel, the research may be missing significant negative impacts on fuel poor households. For example, some households, in the absence of significant improvements to the energy performance of their homes, may need to be spending more on energy (and therefore need more carbon allowances) in order to be warm. Thus, while only small numbers of low income households lose out financially from individual carbon trading, the introduction of individual carbon trading may exacerbate fuel poverty by making it even harder/more expensive to buy energy for heating. This needs to be modelled and tested (using national house condition data relating to building energy performance) to refine the findings of Dresner and Ekins. In addition, financial impacts are not the only distributional impacts to consider. It is also essential to understand geographical distribution, including rural/urban and north/south. And, as outlined in the road map, assessment of access to opportunities to reduce emissions (information and advice,
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services, products and capital) is also relevant since it is unlikely that provision is evenly spread by income or geography. This needs to be understood to shape future programmes to enable individual action in response to individual carbon trading.
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Fawcett T (2005) Presentation to UKERC meeting place workshop on Personal Carbon Trading, Oxford, 2005
26 Eg Dresner S (2002) 'Environmental Tax Reform: What Does Europe Think?' paper presented at the conference 'The Czech Republic and the European Union', Charles University, Prague, 31 October - 2 November, 2002.
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The same carbon cannot be counted in two overlapping trading systems simultaneously if it is, the size of the cap is effectively increased by the degree of overlap. Several cap-and-trade systems could potentially co-exist within a national or international cap but any carbon reductions achieved in one system can only be counted towards that national cap once, and a decision would be needed as to which trading system the carbon savings ultimately had to belong and how they would get there. From a downstream perspective, upstream carbon trading appears principally as a variable carbon tax (though, as discussed in Section 2.5 upstream companies may also respond in other ways to try to change downstream consumer behaviour if they can count the resulting savings) A large proportion of the low cost carbon savings available in the UK are from downstream energy efficiency improvements Carbon taxes do not guarantee emission reductions since consumer reaction to a given price increase is difficult to predict. Because the compliance and damage cost curves of climate change are unknown, carbon taxes can not lead to optimally efficient decisions on carbon abatement. Price signals emanating from upstream carbon trading cannot therefore be relied upon to deliver efficient levels of carbon savings downstream, where a large proportion of the cost effective reduction opportunities lie. Downstream carbon trading appears from an upstream perspective as changes in market demand for products (ie fuels and energy services), based on their carbon content and the price of carbon. The effectiveness with which these changes occur depends on how well the downstream market functions access to information, availability of alternative products etc.
In the UK at present we have a number of supply side and upstream policy instruments in place, but few downstream or demand side measures.
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This said, it would be possible to establish a cap-and-trade system for domestic energy suppliers in which the cap placed on them for domestic electricity and gas related carbon emissions was an appropriate proportion of the total cap placed on individuals (which would also include petrol and aviation). There needs to be some thinking applied to how the reconciliation system would operate. In any individual carbon trading system, individuals are using up carbon allowances when they pay for gas or electricity. The question to resolve is how energy suppliers get to count that carbon allowance towards their cap whilst retaining the individuals capacity to trade his or her allowance. For example, by delineating the cap specifically on electricity and gas use within the individual carbon trading system, the approach could be pre-judging how individuals may wish to respond to their allowance. Individuals may, for example, decide that they would rather install domestic airconditioning and give up leisure flights abroad. Understanding the interaction between such schemes is a subject for further examination in future (see Section 5).
Taxation
Climate Change Levy (CCL) The CCL is the only carbon tax currently in use in the UK. Because it applies only to energy used for lighting, heating and power in non-domestic sectors, it would not interact with a personal carbon allowance system that involved individuals only. However, if organisations were included in the system, the CCL would be rendered obsolete: the Government would have the ability to set overall emissions with certainty, so there would be no need to impose additional taxes on carbon emissions.
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Trading
EU Emissions Trading System It has previously been noted that the same carbon cannot be simultaneously counted on two overlapping systems if this happens, the effect is to double the impact of changes in emissions from the overlapping activities on the collective emissions (ie the sum of the emissions from the two overlapping systems). Our initial analysis indicates that increases in carbon emissions from doubly-traded activities lead to an overall decrease in the collective cap by the same amount, with the converse also being true. This occurs where both markets respond predictably, in the same way, and by the same amount to the creation (or removal) of excess carbon credits. The assumption behind this is that the caps on the two markets are independent and fixed, market participants behave rationally, using the relative costs of carbon credits versus carbon abatement to decided whether to purchase credits or reduce their emissions. The implication of this is that serious consideration must be given to the relationship between downstream carbon trading in the UK, and the EU ETS. If a UK system covered only individuals, with organisations addressed in other schemes, the only problem area would be emissions from the UK electricity supply industry, which are already constrained within the EU ETS. Simply establishing the UK system in parallel would mean that any reduction in UK emissions resulting from domestic carbon trading would introduce hot air into the European market, by creating surplus credits for UK electricity generators (see Appendix 1 for diagram showing this). This hot air would be taken up by other emitters, leading to no net reduction in emissions. Meanwhile, surplus credits would also have been created in the downstream domestic market. Assuming (as above) that these are not retired, but are used to cover additional emissions, the overall result would be an increase in the total emissions from both systems by the precise amount of the reduction in UK electricity emissions. The converse is that if UK electricity emissions were to increase, this would have to be offset completely in both markets, leading to a net decrease in emissions by the precise amount of the increase in electricity emissions. If the downstream system covered organisations as well as individuals, the overlap with the EU ETS would be extended to include all UK participants in the EU ETS. Two obvious solutions present themselves: either UK participants in the EU ETS are excluded from the UK downstream system and the markets kept separate (as happens, by and large, at present), or the EU ETS cap is set to include downstream emissions and downstream trading systems provide carbon savings which EU ETS participants can buy to trade within the EU ETS. As identified above, further work needs to be done to trace the carbon allowances and to establish the interaction between such various caps and trading systems. Renewables Obligation (RO) The RO is a base and trade as opposed to a cap-and-trade system, in that it attempts to maximise the production of a good, rather than minimise the production of a bad. As a result, it is not directly incompatible with the introduction of downstream carbon trading: the quantity being traded in the RO market is not carbon, but megawatt-hours of renewable electricity, the indirect effect of which is a reduction in the carbon intensity of electricity. Nevertheless in a pure domestic carbon market, where carbon intensity informed choices of electricity supplier, a Renewables Obligation might not be necessary.
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Starting from the questions identified at the start of Section 4 and reflecting on the lack of answers to most of these, we have considered which questions would be usefully answered early to refine understanding and improve the quality of information upon which a decision about the future potential value of individual carbon trading can be made. We have focused here on systems of individual carbon trading rather than systems which also include organisational carbon trading. This is principally due to time constraints and also to respond to the focus of the brief for this work. It does not reflect any judgement on the feasibility or desirability of a full downstream trading system compared with a system involving only individual emissions. The Road Map is divided into five one year steps, with steps identified associated with politics, public reaction, modelling and system design. These are sequenced in an order which we believe will build up knowledge and understanding in a logical fashion. Readers should reference back to the questions at the start of Section 4 for a fuller explanation of some of the shorthand in the table in Section 5.2. The first year next steps focus on: Political acceptability: Institutional feasibility: Public reaction: Modelling: Understanding the basis on which politicians would decide to do this Exploring how our political system (electoral cycles, oppositional politics, need for independent authority) could handle this Understanding the basis on which people will judge a system acceptable Improve models of individual carbon emissions and improve understanding of abatement opportunities and costs to create testing rig for systems and model distributional impacts (particularly fuel poverty) Examine potential for full alignment with banking system and simple allocation system based on existing registries
Systems design:
First, we explain our view that it is not good idea to initiate pilots of individual carbon trading.
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most important public reaction of all, which is to the mandatory and national nature of the scheme (with no free-riders); that cannot be piloted. In addition, using a pilot to see how people respond assumes you can create a pilot with no leakage (by annexing the Isle of Wight as some have suggested!), with decent transaction systems and with no sense of free riders. This is unlikely, making a pilot unrepresentative of the real world. However, it may be possible to explore likely individual responses by developing and testing simulation games and trading systems games for groups. What individual and collective strategies emerge? Do people bother to trade? What gaming takes place? This would help identify possible weaknesses and frustrations in a system which could subsequently be ironed out. It would also enable the collection of carbon emission figures for different individuals and households to create a more real world data set to test in the modelling work.
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Public reaction
Public reaction On what basis would the public consider it acceptable? Method: Focus groups of different population segments testing likely opinions and reactions to proposals and exploring perspectives of fairness and free riders (incl. international dimension), tightness of cap, feasibility, cost, fraud, allocations for children etc Feed results into modelling, system design and institutional feasibility activities Modelling
Modelling
Equity/ distributional impacts Review output of modelling of fuel poverty and distributional impacts Consider rural/urban and other geographical distributional implications of trading scheme
Technical costs
System costing design
&
and
Do we understand the basis on which politicians will make the decision? Method: Ask politicians (cross party?) and establish core political acceptability tests to apply to rest of road map steps
Prepare tools for modelling impacts and costs/benefits. Model UK individual carbon emissions and relationship with housing energy performance and actual household income (therefore fuel poverty), travel (incl. aviation) Reflect housing energy performance & actual household income (fuel poverty) in model to enable key impacts to be assessed Develop marginal abatement cost curves for domestic sector Improve data on personal air travel and emissions impacts Assess economic and distributional implications of different cap levels and emissions reduction trajectory and allocations (eg incl. children) Method: Examine existing energy modelling activities within UKERC and Tyndall work programmes to refine methods for achieving above
Is there a simpler and cheaper way to establish individual carbon trading system [eg within the banking system (carbon rather than accounts) with allocation via existing registers of individuals (eg NI, child benefit etc)]? What would it cost and how secure would it be? Method: Explore with banks, APACS and LINK. Ask banking system expert to cost set up, operation and estimate fraud risk Feed costs into modelling strand Develop simulation games for step 2 public reaction
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Political acceptability
Institutional feasibility
Public reaction
Modelling
Equity distributional impacts Assessment of access to opportunities to reduce emissions and identify measures to alleviate
System costing
design
and
Re-test progress against acceptability tests from Step 1 Answer political questions emerging from other strands (particularly public reaction and equity strands) Consider constituency of support required
Feed conclusions into political process and follow through on steps required (eg establishment of cross-party support). Review in detail relationships and potential operational links with proposed energy supplier capand-trade, EU ETS etc
How will the public respond to individual carbon trading? (eg changes in behaviour, equipment purchasing, building improvements, travel choices) What factors determine these responses? (eg cost of carbon, access to opportunities and resources to act, socio-economic factors like income, education) Methods: Simulation games organisations communities
Refine model in light of public acceptability results Explore likely trading and costs of carbon and economic impacts for different caps in different energy price and public response scenarios (eg mainly behavioural change and sacrifice cf investment in lower carbon equipment, vehicles and buildings). Are there crunch points? Method: Use refined model as above to test different trading system designs (incl. hybrid with floor and ceiling carbon prices)
Identify key problems to identify individual circumstances which will be politically sensitive
Extract system requirements from modelling and other strands and develop appropriate system architecture to deliver (eg transaction networks, trading system access, monitoring, reporting and regulatory requirements) What will make it easiest for public to understand and participate [eg units of transaction as tonnes (mostly fractions) or kg (lots)] Method: Ask experts in public understanding of maths and financial literacy what we already know, then actually test on groups of public What are all the games, scams, and rip-offs? Can they be designed or regulated out of the system? What potentially useful secondary financial products would emerge (eg carbon loans/mortgages etc)? Method: Ask loan sharks, stock market traders, financial security experts.
in or
Focus groups of different household segments to explore likely responses to trading systems
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Political acceptability
Institutional feasibility
Public reaction
Modelling
System costing
design
and
Re-test progress against acceptability tests from Step 1 Answer political questions emerging from other strands (particularly modelling strands) Reject or go ahead? Build necessary constituency of support and establish manifesto commitment Develop communications strategy informed by results of step 3 public reaction work Finalise decisions for operational and strategic control (to feed into tender in system design)
Consolidate necessary institutional endorsement with manifesto commitments (all parties?) etc Establish legal framework required to deliver
What is public reaction to different approaches to communicating and framing of introduction and operation of individual carbon trading? Method: Develop and test in focus groups various treatments and communication approaches to the likely scheme
Draw up specification for system design, operation and regulation. Discuss with banking industry, FSA
Ongoing tests of public reaction to communications approaches being developed Develop information campaigns and educational materials to enable people to participate (a la decimalisation, Euro Monitor and evaluate participation in dry-run version
Launch dry-run version (available for public involvement but not with trading to help people establish sense of their emissions relative to likely future cap and to set up joint accounts etc)
Go Live
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b.
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